home appraisals

High demand. Modest value increases. Price sensitive. Those are ways to describe the real estate market in 2016. Today let’s take a deep look into where the market went last year. This post is long on purpose. You can scan it quickly or pour a cup of coffee and spend some time here. If you aren’t in Sacramento, I hope you can still find some value. Do you see any parallels to your market? Any thoughts?

A Market Rush: Overall prices saw a dip these past few months as the regional median price declined 4-5% from summer. This isn’t anything unexpected because it happens virtually every year. Just as there is a season for fishing, fashion, or television, there is also a season for real estate values. Granted, 2016 did have a more aggressive feel in that multiple offers were commonplace, it took an average of 7 less days to sell a home compared to last year, and inventory was sparse at best. In fact, the year closed with the strongest months of sales volume in the past 5 years for November / December. It’s as if there was a rush on the market from September through November that ended up beefing up these year-end stats. Why did sales volume increase? Some say it’s the power of Trump or the anticipation of a new political era. Or it could be buyers were expecting an increase in interest rates and wanted to get in before a rate hike. Or maybe it’s the byproduct of a fall that wasn’t all that dull and a market with strong demand. Or maybe it’s a combination of all or none of the above. 🙂

When looking at the entire year, most price metrics increased 7-9% and sales volume was up a modest 2% overall for the year. Remember, just because price metrics increased by 7-9% does not mean actual values increased by that much (we can talk about that more below if you wish). My sense is prices at lower levels saw larger increases than the middle and upper end of the market, which means a more aggressive bottom tends to create larger increases on paper. I say this because it’s easy to see the median price at 10.5% higher and say, “Values went up by 10.5% last year,” but that just isn’t true for the bulk of the market. On a related note, last week I mentioned trends to watch in 2017, and if I had to add one more thing I would say there could easily be a problem this year with overpricing homes because of so much focus on the market being “hot” without looking at actual data.

A few year-in-review images:

Sacramento County:

The median price was $315,000 in December (6.5% above last December).

Housing inventory is about 10% lower than it was last December.

Sales volume was 7% lower this December compared to last December, but this year and last were higher than 2012, 2013, and 2014.

It took 3 days longer to sell a house last month compared to November.

One year ago in December it was taking 4 days longer to sell.

FHA sales volume is down 6% this year compared to 2015 (but 25% of all sales this year were FHA).

Cash sales are down 11% this year (they were 13% of all sales last month).

The average price per sq ft was $202 last month (about the same as November, but 7.5% higher than last year).

The average sales price at $343,670 is down about 4% from the height of summer (but is 6% higher than last year).

When looking at the entire year in Sacramento County it took 33 days on average to sell a home this year.

A few images to show the bottom and top of the market:

Some of my favorite images this month:

SACRAMENTO REGIONAL MARKET:

The median price was $350,000 in December (7% above last December).

It took 3 days longer to sell compared to the previous month (but 4 less days compared to December 2015).

Sales volume was about 1% lower this December compared to last year.

FHA sales volume is down 6% this year compared to last year.

Cash sales are down 8% this year compared to last year.

Cash sales were 14.4% of all sales last month.

The average price per sq ft was $208 last month. That’s down about 1% from the height of summer and 8% higher than last year.

FHA sales were 22% of all sales in the region last month.

The average sales price was $387,915 in December. It’s down about 5% from the height of summer but 8% higher than last year.

When looking at the entire year in the region it took 37 days on average to sell a home this year.

Some of my favorite images this month:

PLACER COUNTY:

The median price was $423,925 in December (7% above last December).

It took 2 less days to sell compared to the previous month (but 9 less days compared to December 2015).

Sales volume was about 1% lower this December compared to last year.

FHA sales volume is down 11% this year compared to last year (FHA sales were 18% of all sales in Placer County last month).

Cash sales are down a mere 1% this year compared to last year.

Cash sales were 16% of all sales last month.

The average price per sq ft was $216 last month, which is about as high as it’s been all year (about 8% higher than last year).

REOs were 1.5% and short sales were 1.8% of all sales in Placer County.

The average sales price was $472,130 in December. It’s down about 2% from the height of summer but about 9.5% higher than last year.

When looking at the entire year in Placer County it took 42 days on average to sell a home this year.

What does the market expect? That’s one of the best questions we can ask ourselves in real estate. Why? Because it helps us keep the focus on what buyers actually demand in certain neighborhoods and price ranges. In other words, what are buyers really willing to pay more or less for in a neighborhood? Being in tune with that is definitely one of the key aspects of coming up with a credible value.

Pool Example: Take a look at the table below to see how some areas and price ranges in Sacramento have far more built-in pools than others.

Key Point: When built-in pools are more common in some neighborhoods and price ranges we can probably say the market expects a pool, right? This is especially true at the higher end of the price spectrum where over 70% of homes have a pool. In contrast, some areas of town have less than 1% of homes with a built-in pool, and it’s safe to say the market doesn’t expect a built-in pool in those areas. This doesn’t mean the pool is worth nothing in those places, but if anything it’s a reminder to really consider that a pool might be worth far less or more in some areas than others. While it’s tempting to always give a token $10,000 adjustment for a pool, based on the data above alone, that adjustment probably doesn’t make sense for every neighborhood because of differing expectations.

Not Just About Pools: This conversation isn’t just about built-in pools because we have to ask what the market expects for things like upgrades, square footage, condition, lot size, architectural design, bedroom count, garage spaces, landscaping, etc… As much as we’d like instant answers, there really isn’t a quick guide to understand what the market expects without immersing ourselves in comparing sales, talking with buyers and other real estate professionals, and crunching numbers.

Blackstone: One more thing. A recent article talked about the private equity fund Blackstone (Invitation Homes) selling off some of its homes directly to tenants. As you probably know, Blackstone purchased thousands of homes in the Sacramento market several years ago. They continue to buy today, but their purchase volume is minimal and nowhere near what it used to be. Anyway, the article states they would likely sell about 5% of their inventory this year directly to tenants. Whether that’s true for the Sacramento market or not is to be seen, but it’s worth watching closely. Keep in mind many landlords are selling straight to their tenants right now instead of listing on MLS. In short, this isn’t just a Blackstone thing.

Questions: How do you get a sense of what the market expects in a neighborhood? Any advice you’d give on how to better understand market expectations? Did I miss anything? I’d love to hear your take.

I was in line at Starbucks and then it hit me. The perfect analogy for price per sq ft in real estate. While ordering my Grande drip with no room, I began to wonder how much I was paying for each ounce. Maybe that means I’m a geek, but was I really getting the most bang for my buck to buy a Grande (medium)? Or should I go with a Venti (large)? Take a look at the image below to see how price per ounce works at Starbucks, and then let’s consider a real example of this principle in real estate.

Big Point: The larger the cup, the less you pay for each ounce of coffee. Or we could say it a different way. Smaller cups of coffee tend to cost more per ounce. This is interesting, but it’s not really surprising because it’s merely an example of economies of scale, right? We see this principle all the time when buying bigger or smaller items, yet it’s easy to ignore when it comes to housing. So let’s take a look at all residential home sales from last month in Sacramento County. Do you see a similarity with the coffee?

Big Point: The larger the house, the less you tend to pay for each square foot. Or we could say it a different way. Smaller homes tend to have a higher price per sq ft compared to larger homes. This is a principle we see when looking at county-wide data, but it’s also something we tend to see by neighborhood (assuming we have enough data). Just like coffee costs less per ounce the more you buy, it tends to cost less per sq ft for the more house you buy. That’s the big idea.

Be a Great Explainer: I love this analogy. Maybe it’s partly because I’m a coffee fanboy, but in truth talking through price per sq ft is hands-down one of the most relevant conversations to master in real estate. I hope the next time the topic comes up with a client, maybe you’ll think about using Starbucks cups to explain how price per sq ft tends to work in a neighborhood. For a refresher post you can read 5 things to remember about using price per sq ft in real estate.

There are so many factors to consider when valuing a property. Anyone who works in real estate knows this. So how do we account for a difference in age between comps? Does age matter? Should we make any value adjustments? Someone asked me this recently, so I figured it was worth kicking around the issue together. I’d love to hear your take in the comments below.

Question: How do appraisers account for a difference in year built? Do appraisers give an adjustment when to comps there is an age difference?

Answer: Here’s my take. Most of the time buyers tend to buy based on condition instead of age. Thus if there is a difference of a few years or so within a subdivision, it might not have any impact on value as long as the condition is similar. For instance, in some tracts we see an age range of 1977 to 1983. If one house was built in 1977 and another in 1983, and they are in the same condition, it’s unlikely to see the 1983 home command a value premium unless for some reason it has a higher quality or if it is located on a stronger street. Sometimes buyers are actually not even aware of the age of the home. They’re really just looking at the neighborhood and buying what is there. Do you agree?

My $500 Adjustment: I’ll admit when I first began appraising I used to adjust $500 per year on all comps in every appraisal because that’s what I was taught to do. In very technical terms, this valuation methodology is…. bogus. After all, a $500 adjustment per year certainly doesn’t apply to every neighborhood, every market, or every property type. These days though I rarely make any adjustment for year built since most of the time I’m looking at condition instead. However, if the age gap is too large, there may be a difference in value, and we we have to begin asking if we should even be comparing the homes in the first place. For instance, is 1977 vs. 1990 a good comparison? What about 1990 vs. 2003? Maybe not because we might be dealing with a different quality of construction, different tracts, or different markets. But at the same time, we might see homes in one area were built in 1955 and another nearby area has homes built in 1972. If there is no price difference observed between both areas, then the homes may easily be competitive despite their age gap. The thing we need to do though when valuing a 1955 home is to be sure to find 1955 sales instead of just 1972 sales (this helps prove the market really does pay the same amount for both ages).

Subjective Mush: I know this begins to sound very subjective, but there is no rule out there when an adjustment is needed other than when buyers at large have clearly paid more or less because of a feature. In reality it can be tempting to make value adjustments for every single distinction, but sometimes it’s best to not force adjustments by remembering the market isn’t so sensitive as to warrant a price reaction for every single difference. However, a good rule of thumb when searching for comps is to take an “apples to apples” approach. This means we start by searching for similar-sized homes with a similar age rather than choosing newer or older sales that really might not be competitive. I know this sounds basic, but when we keep the fundamentals in mind, it keeps us sharp (right?).

Disclaimer

First off, thank you for being here. Now let's get into the fine print. The material and information contained on this website is the copyrighted property of Ryan Lundquist and Lundquist Appraisal Company. Content on this website may not be reproduced or republished without prior written permission from Ryan Lundquist.

Please see my Sharing Policy on the navigation bar if you are interested in sharing portions of any content on this blog.

The information on this website is meant entirely for educational purposes and is not intended in any way to support an opinion of value for your appraisal needs or any sort of value conclusion for a loan, litigation, tax appeal or any other potential real estate or non-real estate purpose. The material found on this website is meant for casual reading only and is not intended for use in a court of law or any other legal use. Ryan will not appear in court in any capacity based on any information posted here. For more detailed market analysis to be used for an appraisal report or any appraisal-related purpose or valuation consulting, please contact Ryan at 916-595-3735 for more information.

There are no affiliate links on this blog, but there are three advertisements. Please do your homework before doing business with any advertisers as advertisements are not affiliated with this blog in any way. Two ads are located on the sidebar and one is at the bottom of each post. The ads earn a minor amount of revenue and are a simple reward for providing consistent original content to readers. If you think the ads interfere with your blog experience or the integrity of the blog somehow, let me know. I'm always open to feedback. Thank you again for being here.